Interest rates on mortgage loans are at record lows. So why
are so few people taking advantage of them?
In a functional market, borrowers take advantage of low rates
by borrowing more. Yet that's not what's happening. Let's take a
closer look at some of the factors that are preventing some
homeowners from reaping the benefits of low rates.
As low as they can go
Back when the housing market worked more
, there was one thing you could pretty much count on: When
interest rates dropped, homeowners would take advantage of those
lower rates to refinance their mortgages, cutting hundreds of
dollars off their monthly payments or taking the opportunity to
squeeze a little bit more of their equity in the bargain.
Today's conditions would typically make refinancing activity
skyrocket. At this week's Treasury auctions, both 10-year and
30-year bonds set new record-low yields. And according to
, mortgage rates hit new lows for the 11th week in the past 12.
With average 30-year mortgage rates at 3.56%, the typical
mortgage features an interest rate that's nearly a full
percentage point lower than it was this time last year.
But even as rates plunge, refinancing applications fell for
the third week in a row, moving in the opposite direction than
what you'd expect. As a recent CNBC article pointed out, that
counterintuitive combination is nothing new, and it may reflect
the new reality for housing for years to come.
Stuck in their homes
There's more to a mortgage than a rate. If the value of your
property has gone down, then
being underwater on your existing mortgage
can prevent you from getting a refinanced loan. That's part of
why the government expanded the authority of
and Freddie Mac to refinance loans under the Home Affordable
Refinance Program, letting them eliminate restrictions on
negative equity in allowing refinancing transactions to take
place. Other program changes have opened up new opportunities for
large groups of homeowners to refinance, and surges in
refinancing activity have resulted.
Still, banks are being careful about mortgage activity. With
Bank of America
) , and
) still reeling from their $25 billion settlement with federal
and state regulators, the
banks are eager to avoid any repeat of the
painful foreclosure-abuse episode
. The solution is demanding higher-quality loans that they'll
to foreclose on.
But another reason for the decline in refinancing activity may
simply be the fact that so many homeowners have
refinanced in the recent past. Given that rates have steadily
declined over the past several years, there have been plenty of
opportunities to refinance. Yet with
homeowners having to jump through increasingly
to go through the refinancing process, as well as having to pay
what can be hefty closing costs each time, many of them may
simply have decided that enough is enough. That's been good news
American Capital Agency
(Nasdaq: AGNC) and other mortgage REITs, which face challenges
when high levels of refinancing activity lead to returns of
principal on mortgage-backed securities sooner than expected.
That could all change if the Federal Reserve gives any signal
that interest rates might rise anytime in the near future. Right
now, homeowners are being rewarded by their patience, as they
keep the potential to lock in even lower rates down the road. But
if rates start to go
, then it might prove to be the spark necessary to convince
homeowners that it's worth going through the process one last
time and maximizing their savings.
What to do
If you're on the fence about refinancing, don't just ignore the
current opportunity. Run the numbers and talk with your lender
about the possibility of reducing closing costs for a simple rate
change on your mortgage loan. In some cases, by paying a slightly
higher rate (that's still lower than you may be paying now), you
may be able to get some of your closing costs credited back to
you. Your loan officer or mortgage broker should be able to go
through all your options.
Low rates won't do anyone any good unless more people take
advantage of them. Mortgage rates might continue dropping, but
even at their current levels, refinancing is worth considering if
you haven't done it recently.
Being smart about your home loan is just one part of a
successful financial plan. Investing smarter is also important.
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Fool contributor Dan Caplinger is very happy with his
mortgage situation. He doesn't own shares of the companies
mentioned in this article. You can follow him on Twitter
@DanCaplinger. The Motley Fool owns shares of JPMorgan Chase,
Bank of America, Wells Fargo, and Citigroup, and has created a
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